HomeFree weekly newsletterFree newsletter archiveCustomer surveysSelf Managed Super Fund Book storeContact usATC in the pressLogin
Self Managed Super Fund (SMSF) Article
Very important estate planning court case
By Tony Negline.
This article may be out of date.
30th November 2005
A recent decision of the NSW Supreme Court has clearly shown the benefit of making sure what happens to your super benefits on death is specifically set out.
The court action stems from the death of Mr Ervin Katz in September 2003.
In March 1965, Mr Katz's employer started a small super fund to provide retirement benefits for its employees and Mr Katz immediately became a member of the fund. At the time of his death Mr Katz was the only member of the fund and the fund had assets of more than $1 million. He had completed a non-binding death benefit nomination some time before his death which said that he wanted his death benefit to be paid equally between his daughter (Linda Grossman) and his son (Daniel Katz).
This type of nomination give a trustee an indication of what a member would like to happen but under most trust deeds the trustee must take the nomination into account but does not have to follow it.
Since its establishment the Katz fund's trust deed had been amended a number of times. Before Mr Katz's death the last deed upgrade occurred in 1995. It is reasonably safe to assume that this amendment occurred to ensure the fund complied with the Superannuation Industry Supervision laws which were then just starting.
The judgment for this case spends a considerable amount of time discussing the differences and impacts of the various deed amendments that have occurred over the years. The fact that the judge deemed it necessary to make this analysis clearly shows that great care has to be taken when updating a super fund's trust deed. Poor quality work (which in some cases will be done for the sake of administrative convenience or cost) may ultimately be very expensive because aggrieved parties always find fault in prior documents.
Mr Katz's wife, Evelin, died in July 1998. She had also been a member of the super fund. Probate for her was granted in March 2000 and Mr Katz was the executor and sole beneficiary of the estate. In May 1999 Mr Katz decided to appoint Linda (his daughter) as an additional trustee of the super fund and not long after they decided to pay out Mrs Katz's death benefit of over $550,000, to her surviving husband.
The rules which allow a Self Managed Super Fund to remain as a SMSF when a member dies say that the deceased's legal personal representative can act as trustee for the deceased between the members date of death and the date when death benefits commence to be payable.
Mr Katz's son believed that the appointment of his sister was not allowed but the judge did not agree and used the NSW Trustee Act to justify his view. That legislation says that a new trustee can be appointed where one trustee is dead.
In any event the Katz super fund had individual trustees and as Mr Katz was the only member he needed another person to act as trustee so that the fund remained a SMSF.
One month before Mr Katz died, Linda Grossman applied to become a member of the fund. Acting alone as trustee she accepted herself as a fund member. No evidence was presented to show that Mr Katz consented to this application and the judge decided that Linda's fund membership had not been done properly.
In December 2003, Linda appointed her husband as a trustee of the fund. The judge allowed this appointment because the fund's trust deed said that a new trustee needed to be appointed within 90 days of a trustee vacancy arising. Further the judge believed that the NSW Trustee Act allowed Mrs Grossman to appoint her husband as trustee.
As a result of all these decisions the fund effectively had three trustees – Mrs and Mrs Grossman and Mr Katz's executor. Clearly a majority is formed by Mr and Mrs Grossman. In any event Mr Katz's executor was not appointed until August 2004.
The judgment notes that Linda Grossman has refused to confirm that she would pay out her father's death benefit in accordance with his non-binding death benefit nomination mentioned above. And it is this refusal which may be the cause of the legal action.
Who paid for this court action? The judge said that the costs of both parties should be paid out of the super fund. In other words the value of the death benefit has been substantially reduced.
Michael Hallinan of Sydney based Townsend Lawyers believes that this dispute might have been avoided if Mr Katz had completed a binding death benefit nomination. However the super fund's trust deed was quite old and it may not have allowed these nominations.
Daniel Butler of DBA Butler Pty Ltd said that the case highlights the importance of an indepth knowledge of all the rules because “superannuation law, general trust law and succession law were all vital to this case”, he said. “The importance of the succession to the trustee of a SMSF is also very important. If the two children had been appointed members of the fund, they would have also become the successor trustees. Allowing one child to be a co-trustee in this case provided control over the deceased father’s death benefit.”
Clearly this decision has very important implications for all SMSFs.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.